Utilizing the principles of real estate economics to calculate the value of on-site production
Urbanism is accelerating the growth of cities, and even now the built environment receives majority of new global new investments, consumes 40% of energy and produce 40% of carbon emissions.
It is known that buildings can significantly reduce their carbon footprint by decentralized on-site renewable energy production. However, investments into on-site production have not picked up the pace necessary for fast climate mitigation and subsequent EU policies. One reason for this is that on-site production is considered more expensive than conventional off-site production, and it is assumed that public subsidies are required for profitability. For example, the cost comparison between PV and different electricity generation technologies is most often calculated using the Levelized Cost of Electricity (LCOE). We claim that the LCOE approach is based on an out-dated transformation concept of production, and its application to on-site production. Previous implementation schemes of on-site production is based on lowering the LCOE rather than understanding how on-site production creates value for the customers, i.e. property and building owners. We claim that understanding the logic of the customer is essential to produce a scalable and bankable innovation of on-site production.
On this basis, we have developed a novel concept (published last year in respected Renewable and Sustainable Energy Reviews journal), where we utilize the principles of real estate economics to calculate the value of on-site production. When properly assessed, the on-site production in urban areas increase the value of the underlying properties more than the capital cost of the on-site production investment.
If this decision metric is widely acknowledged, it could significantly speed up investments and new capital into on-site production as decision-making could become more transparent and easier. We believe that by combining the knowledge from both real estate and energy investment classes create a new bankable green asset class for on-site production. To be more precise, we aim to present that on-site production should be as bankable as the underlying properties and buildings.The goal of this project is to finalize our innovation and develop a strong case for justifying profitable and liable on-site production. The property market is probably the oldest investment class in the world, and there is a lot of capital available in the class, which is seeking bankable new assets. Validating the innovation could significantly change the investors’ and banks’ attitude to on-site production. In order for private capital to flow from traditional real estate investment into this new class that is closely related to buildings, the stakeholders must understand the risk and value creation mechanism logic behind these investments.
We are especially happy to discuss this project with researchers, debt financiers, real estate investors and district network operators as well as regulators from city and electricity distribution perspective.
Aalto University leads this project in collaboration with Finnish cities, banks and district network operators.
Dr. Jussi Vimparipostdoctoral researcher
Dr Jussi Vimpari has a doctor of science degree in real estate economics from Aalto University. Jussi is currently working as a postdoctoral researcher at Aalto and his research focus is on applying property investment and finance techniques to building integrated renewable energy production and management. Jussi has published ten peer-reviewed research articles in international journals. Prior returning to Aalto last year, Jussi was a co-founder and CEO of Nordic Shine Ltd that raised, together with Evli Bank Plc, the first multi-million euro equity solar PV fund in Finland. Evli also acquired the majority of Nordic Shine.